Governor of the Bank of Japan Haruhiko Kuroda (L to R), United States Federal Reserve Chair Janet Yellen and President of the European Central Bank Mario Draghi.

Reuters

Follow along as MarketWatch keeps tabs on the key speeches, comments and reactions from the Kansas City Fed’s conference in Jackson Hole, Wyo., which will feature speeches from Federal Reserve Chairwoman Janet Yellen and European Central Bank President Mario Draghi.

Obstfeld declined to provide an updated forecast for global growth this year, saying the IMF will put out a new economic forecast in five weeks at its annual meeting. But his economic team was “certainly not going to lower” its new forecast from the prior estimate of 3.5% growth, Obstfeld said. The IMF chief economist said there was a broad-based global economic recovery ongoing in a way that hasn’t been in a decade. Still, not all countries are participating, he noted, especially emerging commodity exporters that remain “in the doldrums.” And tepid growth is another longer-term risk, he said. Low potential growth leads to political tensions that lead to increased calls for protectionism, he noted.

Financial markets have to better prepare for the day that central banks raise interest rates, said IMF Chief Economist Maurice Obstfeld on Friday. Speaking on CNBC, Obstfeld said there was a worry that asset values will get overstretched asset as central banks start to tighten. “If there is a lot of debt out there, whether public or private debt, that can be a risk,” he said. Financial stability is best handled by regulation, not rate hikes, he said. He said there was no rush for central banks to raise rates given low inflation and output gaps.

One final quote of the day: “It looked as if ECB President Draghi and Fed Chair Yellen had competed to see who could produce the speech least relevant to monetary policy. We call it a 0-0 draw,” said Paul Mortimer-Lee, chief market economist at BNP Paribas.

The post-speech comments from Draghi suggest that policy will still be loose in the euroarea even as bond buys eventually become a thing of the past. He said the ECB bond-buying program has been “very successful” and that a significant degree of monetary accommodation is still warranted.

Not much market reaction to Draghi, with the Dow up 71 points a little less than hour left to the trading week.

Here’s a nugget, which is a little depressing, from Draghi’s speech.

Old-age dependency ratios are rising, putting more pressure on public finances. By 2025 there will be 35 people aged 65 and over for every 100 persons of working age in OECD countries, compared with 14 in 1950.[10] At the same time, public debt levels have surged in those countries from 56% of GDP in 2007 to around 87% today.[11] Only higher potential growth can provide a lasting solution.

“To inject more dynamism into the global economy we need to raise potential output growth, and to do so with ageing societies we need to lift productivity growth. For advanced economies that are close to the technological frontier, this depends crucially on openness to trade.

Yet openness to trade is under threat, and this means that policies aimed at answering this backlash are a vital part of the policy mix for dynamic growth. Some of those policies can be implemented domestically, but some can only be effectively enacted through multilateral cooperation,” he says.

Powell said he didn’t expect any adverse reaction to a decision, expected soon, to start to shrink the balance sheet. But Powell said a negative reaction certainly was possible. “We’ve worked carefully and patiently to put together a plan and we’ve socialized that plan and the markets seem to have accepted it, and I do think the time will be here soon to start to normalize the balance sheet,” Powell said on CNBC. But he admitted that markets could suddenly have a negative reaction, along the lines of the taper-tantrum of 2013. The taper tantrum is a reference to the run-up of nearly 1 percentage point on the yield of the 10-year Treasury after then-Chairman Ben Bernanke discussed the tapering of bond purchases for the first time. “Of course if it happens, we’ll have to react to that,” he said.

Fed Governor Jerome Powell says that Yellen’s speech did not put her at odds with President Donald Trump’s desire to roll back the new rules governing Wall Street. “I don’t really read it that way,” Powell said in an interview on CNBC. “What the Chair really said…is we need to protect the important fundamental reforms, higher capital, higher liquidity, stress testing, resolution planning, that sort of thing. But at same time she said clearly that we’re committed to reviewing the reforms to see whether they are effective and where there can be improvements. She said that several times in her speech,” Powell said.

Michael Hanson, head of global macro strategy at TD Securities, says financial stability is a growing focus at the Fed. Some hawkish regional Fed presidents hawks like Boston’s Eric Rosengren, Cleveland’s Loretta Mester and Kansas City’s Esther George have the traditional view that low rates can foster financial excesses and stability concerns. But others, like New York Fed President William Dudley, think easier financial conditions are a sign the transmission mechanism for monetary policy is impaired and the central bank must keep raising interest rates to get the desired market reaction.

Clearly there is a real fear of “stressing” market conditions ahead of the key quantitative tightening messages in the pipeline from the Fed in September and from the ECB, probably gradually over the rest of the year.

With market rates drifting lower as central bank heads remain tight-lipped over the summer, weighed down by the gravity of excess liquidity and the hunt for yield in a low-volatility environment, the pressure lies overwhelmingly on forthcoming policy announcements in September to guide market direction for the rest of the year. This means several critical months for the markets ahead.

Jacob Frenkel, chair of J.P. Morgan Chase International, said Yellen’s speech included an “implicit” message on interest-rate policy. The Fed chairwoman was saying that financial stability concerns would not slow down future rate hikes, Frenkel said in an interview on CNBC. “In fact, I think it is exactly the financial stability concerns that should encourage the Fed to raise rates,” Frenkel said.

That burst of market activity after Yellen has fizzled. Dow now up just 40 points, though the dollar significantly weaker.

“She came out with a very balanced discussion,” said Jason Furman, who was Obama’s former chief economic adviser, on Bloomberg. Furman also commented on the lack of business dynamism, which he attributes to less competition. (Corrected first name.)

Carl Tannenbaum, chief economist at Northern Trust, said he thought the speech was confirmation that concern about easy financial conditions are rising at the Fed.

“I think many on committee would like to keep on track for policy normalization because year and a half a lot of what they have done been undone by easing financial conditions,” he said in an interview.

Tannenbaum also pushed back on speculation that Yellen’s speech is a sign she is no longer in the running for a second-term as Fed chief. “I’ve seen odds that there is only a 25% chance she is reappointed. If I had a nickel I might take a punt she stays,” he said. Yellen is a “known quantity” and represents some level of stability in Washington, he said.

The market reaction to Yellen’s comments – the drop in the dollar and the rise in Treasurys and equities – is a relief rally due to the fact that Yellen “did not signal a desire to extend the rate tightening cycle,” said Sal Guatieri, senior economist at BMO Capital Markets, in an email.

Another Fed watcher agreed that the speech was a sign that Yellen will be a one-term Fed chairwoman.

“Fed Chair Janet Yellen’s passionate defense of the post-crisis tightening of financial regulation isn’t going to go down particularly well at the White House. Donald Trump has made rolling back regulation the centerpiece of his presidency,” said Paul Ashworth, chief U.S. economist at Capital Economics. “That might just make the National Economic Council head Gary Cohn the favorite to become the next Fed Chair, when Yellen’s current term expires next February,” he added.

The dollar
/quotes/zigman/1652083/delayedDXY meanwhile is sagging. This makes sense if you take away from Yellen’s comments on financial stability that there is no need for the Fed to use interest-rate policy to act against it.

The Dodd-Frank law and regulations put in place since the financial crisis have made the financial system “substantially safer,” Federal Reserve Chairwoman Janet Yellen said Friday in a ringing defense of the rules now under fire from President Donald Trump and J.P. Morgan CEO Jamie Dimon.

Speaking on Bloomberg, Dallas Fed President Robert Kaplan says he wants to be “patient” in removing accommodation. He doesn’t rule out a third rate hike in 2017, but pressed whether inflation had to rise, he didn’t definitely say. Kaplan does say it’s time to get started with reducing the balance sheet. “We should begin it soon.”

As for financial stability, Kaplan says what he is looking for is debt buildup — and not, say, a stock market or housing market correction. “That might even be healthy,” he said. But he hasn’t seen such a buildup. He credits stress testing as a key reason why such a debt buildup has not occurred.

“Investors have gotten used to idea that rates will be lower for longer,” Kaplan said. Aging demographics should slow GDP growth but justify higher valuations.

Cleveland Fed President Loretta Mester, speaking on CNBC, said she did anticipate a little bit of stimulus, but not much, into her economic forecast. Mester says she’s not overly concerned with stock market — she points out, earnings have been pretty good, and interest rates have been low.

“Getting monetary policy back to normal is the appropriate thing to do,” she said. Mester said she is not in the camp of waiting for inflation to come up to 2% before a third rate hike.

And we have some incoming economic data: U.S. durable-goods orders fall 6.8% in July. But core capital goods orders rose 0.4%. The big drop was a reaction to a flood of orders for Boeing planes at an air show the prior month.

Good morning to the biggest day of the year (in the central banking world). There are speeches on tap from Federal Reserve Chairwoman Janet Yellen, European Central Bank President Mario Draghi, and more.